Using a newly developed dataset this paper examines the cyclicality of private capital
inflows to low-income developing countries (LIDCs) over the period 1990-2012. The
empirical analysis shows that capital inflows to LIDCs are procyclical, yet considerably
less procyclical than flows to more advanced economies. The analysis also suggests that
flows to LIDCs are more persistent than flows to emerging markets (EMs). There is also
evidence that changes in risk aversion are a significant correlate of private capital inflows
with the expected sign, but LIDCs seem to be less sensitive to changes in global risk
aversion than EMs. A host of robustness checks to alternative estimation methods,
samples, and control variables confirm the baseline results. In terms of policy
implications, these findings suggest that private capital inflows are likely to become more
procyclical as LIDCs move along the development path, which could in turn raise several
associated policy challenges, not the least concerning the reform of traditional monetary
policy frameworks.